State proposal could borrow millions from cities

The state has a new proposal to address California's budget deficit: take property tax money from cities.

And Bay Area city officials are steamed, even though some wonder whether the plan is a pre-election scare tactic.

Last week, the state's Department of Finance informed cities of its proposal to borrow as much as 8 percent of local governments' property tax revenues — giving the state an extra $2 billion. The cities could in turn borrow the money from the private sector, the proposal suggests, but city leaders scoff at the notion.

The plan would affect cities, counties, towns and some other local districts. Under a ballot measure passed in 2004, the state would be required to repay the money in three years with interest.

The 8 percent loss would come as local agencies are already cutting police, public works, parks and other services.

The League of California Cities alerted local leaders to the proposal last week. Chris McKenzie, the league's executive director, called the borrowing plan irresponsible, saying it would make more public safety cuts likely because local governments are already burdened with cutbacks. The league is urging Gov. Arnold Schwarzenegger to reject the idea.

For Walnut Creek, an 8 percent cut would mean a loss of $1.7 million next fiscal year, said City Manager Gary Pokorny. Walnut Creek leaders are grappling with how to deal with a shortfall already at $5.4 million.

The borrowing proposal "is about 4 percent of our budget, and it's on top of sales tax collapsing and property taxes are down — it's just another burden," Pokorny said.

The city has an emergency reserve of $6 million, but Pokorny questions why the state's emergency should become Walnut Creek's.

The state budget plan passed in February to close the $42 billion deficit counts on $6 billion from six ballot measures — Propositions 1A through 1F — passing in the May 19 special election. Since then the deficit has grown by another $8 billion, and late Monday Schwarzenegger sent a letter to legislative leaders saying the budget deficit has grown to $15.4 billion. If the ballot measures fail — early forecasts show five of the six propositions are losing — the shortfall could be closer to $21.3 billion, Schwarzenegger said.

Regardless of the motivations behind the proposal, Pokorny said the city should prepare for the Finance Department's proposed "borrowing" of tax money.

"We have to take the governor at his word and this is a possibility," he said. "He is not saying they will do it, but it's a possible consequence."

State Sen. Mark DeSaulnier, D-Concord, said the proposal is a bad idea.

"We deliberately try to protect education and local government as much as we can," DeSaulnier said. "Local government is a priority for many Californians. That's where they get their services "... from local government."

On the other hand, he said it was premature to discuss what would happen if the ballot measures fail.

"If all these initiatives go down, we're going to have to look at Prop. 1A (which guarantees city funding); we're going to have to look at Prop. 98 (which guarantees school funding); we're going to have to look at a lot of things," DeSaulnier said.

The state proposal may well be an attempt to sway voters to support the propositions, he said, and that it made him "a little suspicious" being announced two weeks before the special election.

The proposal would cost Concord about $2.24 million, said City Manager Dan Keen — money the city can ill afford to lose.

"It may be an effort to influence the election upcoming," Keen said. "But if the election fails, we are concerned that the state will have few options, and, given their record in the past, that they will try to come after cities."

Keen is skeptical about the state repaying any money it borrows.

"Their track record isn't very good. We're still waiting on repayment of some loans back in 1993 to redevelopment agencies," Keen said.

Marc Grisham, Pittsburg's city manager, said an 8 percent cut would be a $256,000 loss for the city. Pittsburg also has a "rainy-day fund," but Grisham bristles at the suggestion Pittsburg should fork over any of that.

"Now, because we have been prudent they are going to take our money to solve their problems relating from a lack of leadership in Sacramento," he said. "Additionally, this looks like blackmail to threaten basic public services to get the propositions passed."